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From Severance Pay to Self-Insurance: Effects of Severance Payments Savings Accounts in Colombia

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  • Kugler, Adriana

    () (Georgetown University)

Abstract

In 1990 Colombia replaced its traditional system of severance payments with a new system of severance payments savings accounts (SPSAs). Although severance payments often are justified on the grounds that they provide insurance against earnings loss, they also increase costs for employers and distort employment decisions. The impact of severance payments depends largely on how much of the costs to employers can be shifted to workers. The theoretical analysis in this paper shows that, in contrast to a traditional system of severance payments, the system of SPSAs facilitates the shifting of severance payments costs to workers in the form of lower wages. Empirical results using the Colombian National Household Surveys indicate that the introduction of SPSAs shifted around 80% of the total severance payments contributions to wages and had a positive effect on weekly hours. Results using the 1997 Colombian Living Standards Measurement Survey suggest that, although SPSAs in part replaced employer insurance with self-insurance, SPSAs continue to play a consumption smoothing role for the non-employed.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 434.

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Length: 43 pages
Date of creation: Feb 2002
Date of revision:
Publication status: published in: Journal of Public Economics, 005, 89 (2-3), 487-500.
Handle: RePEc:iza:izadps:dp434

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Keywords: consumption smoothing; unemployment insurance; tax shifting; Distortions; crowding out;

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References

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Cited by:
  1. Eslava, Marcela & Haltiwanger, John & Kugler, Adriana & Kugler, Maurice, 2004. "The effects of structural reforms on productivity and profitability enhancing reallocation: evidence from Colombia," Journal of Development Economics, Elsevier, vol. 75(2), pages 333-371, December.
  2. Chacaltana, Juan, 2009. "Economic implications of labour and labour-related laws on MSEs : a quick review of the Latin American experience," ILO Working Papers 433276, International Labour Organization.
  3. Leonardo Gasparini & Hernán Winkler & Francisco Haimovich & Matías Busso, 2006. "Employability in the Southern Cone," IDB Publications 22058, Inter-American Development Bank.
  4. Martin Schindler & Mariya Aleksynska, 2011. "Labor Market Regulations in Low-, Middle- and High-Income Countries: A New Panel Database," IMF Working Papers 11/154, International Monetary Fund.

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